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HL comment (29 July 2019)

Ryanair's first quarter results saw after tax profits fall 21% to EUR243m due to higher fuel prices and the cost of expanding the service. However, most analysts had pencilled in an even steeper decline, so results are slightly ahead of consensus.

Our view

Ryanair is a strong player, but is unfortunately in a tough industry. Economic conditions and fuel prices can be your friend one minute, but bring headaches the next. At the moment, fuel costs are impacting the cost base, and Ryanair's cutting prices to cope with intense competition.

However, we think the group has a couple of trump cards.

It owns the majority of its planes outright and has relatively little debt, and the balance sheet looks strong in our opinion. But perhaps its biggest strength is the cost base. Ryanair has the lowest per seat cost base in Europe.

Since forming in the mid-80s it's kept costs in check by offering a no-frills service. It also flies from a mix of primary and less expensive secondary airports, using its size to negotiate favourable terms.

The current challenges have brought about the demise of several smaller competitors, but we think Ryanair's cost leadership should help it remain robustly profitable. It could even emerge in a stronger competitive position.

Running a tight ship means the group can offer enticing ticket prices. And with price the sole driver for many holiday-makers, the group's planes set off an impressive 96% full. Each plane full of punters is then charged for all the little extras from leg room to paninis, meaning around a third of revenue comes after the ticket has been sold.

Of course, there are drawbacks to Ryanair's model. The cost base is more exposed to fuel prices than its upmarket competitors, and the group has had its fair share of run-ins with staff and air traffic controllers. A very public feud with pilots led to strikes and thousands of cancellations and Ryanair had to up its pay packages to settle the dispute.

While we think Ryanair should be able to outlast smaller rivals, competition remains intense and the race to the bottom on prices is painful. This, and the fact Brexit uncertainties linger, means the shares trade on 2.6 times book value and 12 times expected earnings, below the longer term average on both measures.

Ryanair doesn't distribute a share of the profits through dividends, but has engaged in regular share buybacks. The current EUR700m plan represents around 6% of its market cap.

Half year results

An 11% increase in passengers, which includes the bump from the Lauda acquisition, has translated into a corresponding rise in revenue (up 11% to EUR2.3bn). The group was able to hold revenue per passenger level despite a 6% decline in fares because of a good performance from ancillary revenue, up 14% per passenger.

Total operating cost rose 19% to EUR2bn, driven by a 24% rise in fuel costs to EUR783.9m due to higher prices & volume growth. On an ex-fuel, per passenger basis costs rose 4%, in part due to the consolidation of Lauda.

Despite a change in accounting rules meaning EUR220m of lease are now classified as debt and the group repurchasing EUR97.2m of shares in the quarter (of the EUR700m of expected buybacks) net debt remained broadly stable at EUR419m.

Ryanair says Q1's weak fare trends have continued into Q2, and so guidance for revenue per passenger is nudged down to 2-3% from 2-4%. Volume growth expectations have also been moved down marginally to 7%, on account of delays in the delivery of Boeing MAX aircraft.

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